Banking in emerging markets

Investing for success

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Driven by an expanding middle class, rapid-growth markets (RGMs) are the new engines of growth in global banking. Our report “Banking in Emerging Markets: Investing for success” explores 11 RGMs (see box below) rising alongside the BRICs and growing at twice the rate of developed markets.

The potential is immense. 88% of survey respondents are optimistic about their banks’ financial performance and expect the outlook to improve for most business lines. Across the 11 RGMs, we estimate that bank credit to the private sector will grow by over $1.5tn between 2013 and 2018.

If banks are to take advantage of the opportunities these markets offer, they must understand their specific challenges and make investments in three key areas.

Understanding the challenges

Frontier RGMs (Kenya, Nigeria, Vietnam) Have per capita GDP below US$2,000 (the point at which deposit and savings products typically appear) and nascent capital markets with a capital market depth under 50% of GDP

Transitional markets (Colombia, Egypt, Indonesia) Typically at least 30% of the population has bank accounts, and capital markets are further developed

Established RGMs (Chile, Malaysia, Mexico, South Africa, Turkey) Have per capita GDP above US$8,000 (the point at which credit products become established) and capital market depth of over 125% of GDP

Strong growth remains the underlying trend in these RGMs. However, certain headwinds are strengthening as markets matures, and almost three quarters of respondents expect the industry will struggle to maintain current returns on equity in the next year. Banks face three main challenges.

Tougher regulation

Regulation is now a key battleground between global and domestic banks. 79% of bankers expect an increase in regulation in their country over the next year.

Intensifying competition

More than 75% of bankers see price competition on business loans, retail loans and deposits as a challenge. As political and trading blocs drive pan-continental banking, local banks will struggle against global and regional players as their clients expand into new markets.

Key investments

Banks are already responding to these challenges by strengthening risk management, improving capital and business efficiency and focusing on winning profitable customers. However, success will be hard to achieve without significant investment by banks in three key areas:

Technology to...

Improve efficiency of internal operations

Reach new customers and build enduring relationships with existing customers

People to...

Provide high-touch service and support assessing credit risk in the front office

Drive innovation and efficiency programs in the back office

Partnerships to...

Plug capability gaps and target new customer segments by collaborating with other financial institutions and firms from other sectors

Press release

Methodology

We interviewed senior executives at more than 50 leading financial services institutions and more than 9,000 retail banking customers. Responses compiled in our survey represent more than one-third of total banking assets across those markets.

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